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Moody's extends rating review of HSH Nordbank AG's ratings

06 Sep 2018

Frankfurt am Main, September 06, 2018 -- Moody's Investors Service has said today that it has extended its review
for upgrade of HSH Nordbank AG's (HSH) Baa3 long-term senior
unsecured debt, deposit, issuer and junior senior ratings,
and of all of the bank's other unguaranteed ratings and rating inputs
that are currently under review for upgrade, excluding hybrid debt
instruments issued by various HSH funding vehicles, rated C(hyb).
Moody's has also extended the review for upgrade of the HSH Nordbank,
Luxembourg Branch's senior unsecured debt and other rating inputs.
The review extension follows a communicated update to the expected timeframe
of the closing of HSH's sale to a new consortium of owners. HSH
said in its first half 2018 report that it now expects the closing of
its sale to a private sector buyer group to occur not before the fourth
quarter of 2018.

RATINGS RATIONALE

HSH's current ratings reflect (1) its b3 BCA; (2) the b1 Adjusted
BCA, which includes two notches of rating uplift for affiliate support
from Sparkassen-Finanzgruppe (S-Group, Corporate Family
Rating Aa2 stable, BCA a2); (3) the result of Moody's
Advanced Loss Given Failure (LGF) analysis, which provides three
notches of rating uplift for senior unsecured debt and deposits;
and (4) moderate government support assumptions, which result in
one notch of rating uplift.

The review for upgrade of HSH's b3 BCA reflects the potential for significant
improvement in the bank's solvency profile, and reduced complexity
and uncertainty about the bank's future direction, once the required
approvals for the announced sale of the bank to a private-sector
bidder group are obtained.

The rating review will also take into consideration the bank's announced
eventual exit from S-Group and its institutional protection scheme
(IPS) following a multiyear transition period, which Moody's
will reflect in a significantly lower affiliate and government support
assumption once the sale materialises.

Moody's initiated the review on 28 February 2018 following an announcement
made by HSH's current owners, the City State of Hamburg and the
Land of Schleswig-Holstein, that an agreement to sell the
bank to a group of private investors was signed.

Several steps have been taken since then to complete the closing of the
sale, including its approval by Hamburg's and Schleswig-Holstein's
federal state parliaments and an agreement on the terms of an early settlement
of the asset guarantee provided by both owners, as well as an amendment
of S-Group's articles of association that opens the possibility
to grant HSH a third year of coverage by its IPS following the closing
of the sale.

For the sale to become effective, outstanding approvals are required
from the bank's supervisory authorities and the European Commission,
as well as the confirmation of S-Group that it uses its option
to extend its IPS coverage by one year. S-Group and the
bank continue to negotiate a smooth transition of HSH into the voluntary
deposit guarantee fund of Germany's private banks.

WHAT COULD MOVE THE RATINGS UP/DOWN

As indicated by the rating review for upgrade, Moody's expects
to upgrade, by one notch, HSH's Baa3 long-term
deposit and senior unsecured ratings, the Baa3 Counterparty Risk
(CR) Rating and the Baa3(cr) CR Assessment once all remaining hurdles
to the closing of the entity's signed ownership change are cleared,
and the rating agency's assumptions in relation to the expected
stronger credit profile of the bank are met.

While currently unlikely, as indicated by the rating review for
upgrade, a pronounced negative deviation of HSH's future financial
performance from the solvency and liquidity metrics or liability structure
Moody's expects could result in a downgrade of the bank's
ratings.

In the event that HSH's sale does not materialise, Moody's
would reassess the bank's financial profile and rating components
with a focus on the bank's, its owners' and S-Group's
ability to swiftly adopt alternative steps that comply with the requirements
of the European Commission's road map for the bank's future
development.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings/analysis was Banks published
in August 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.

Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.

This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
ratings tab on the issuer/entity page on www.moodys.com
for the most updated credit rating action information and rating history.

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